Money Basics · Lesson 7 of 14
Separate a Business Measure From a Trading Signal
Revenue, earnings and P/E describe a business. Support, resistance and moving averages describe past prices. Neither predicts the future on its own.
In this lesson
- Define revenue, earnings, EPS and the price-to-earnings ratio
- Explain what support, resistance and moving averages can and can’t tell you
- Compare results fairly against a benchmark
Business measures
- Revenue — money a business earns from sales before expenses.
- Earnings — its accounting profits.
- Earnings per share — the relevant earnings divided by the number of shares outstanding.
- Price-to-earnings ratio — the share price divided by EPS. The result depends on which earnings period you use, such as the past year or an estimate for the next.
Example Consider this example
A stock at $40 with annual earnings of $2 per share has a price-to-earnings ratio of 20 using those earnings. That ratio alone doesn’t tell you whether the shares are fairly valued.
Chart measures
Support describes an area where buying previously slowed a decline. Resistance describes an area where selling previously slowed a rise. Both describe the past, and both can fail.
A moving average smooths past prices over a chosen period. It shows where price has been, not where it will go.
Note
StratosHedge also draws levels estimated from options positioning, such as the Ceiling and the Floor. They’re model estimates rather than past prices, and like support and resistance they can move during the day and can fail. The Read the Map track explains them.
Compare against a benchmark
A benchmark is a reference used to compare results, such as a broad stock index. Compare investments over the same dates and consider income, fees, taxes and risk. A return achieved by taking much more risk isn’t automatically a better result.
Check your understanding
4 questions. Answer each one, then open “Show answer” to compare.
Question 1 of 4 A stock trades at $75, and its earnings over the past year were $3 per share. What is its price-to-earnings ratio on those earnings?
Show answer
Answer: 25.
$75 ÷ $3 = 25. On next year’s estimated earnings the ratio could be quite different, so always check which period a P/E uses.
Show answer
Answer: False.
A P/E is one comparison of price and earnings. Whether it’s reasonable depends on growth, risk, the industry and which earnings period is used.
Show answer
Answer: C. Not much yet: compare them over the same dates, after costs, and consider the risk each took
Results over different periods aren’t comparable. A fair comparison uses the same dates and accounts for income, fees, taxes and risk.
Show answer
Answer: False.
Support describes where buying slowed declines before. It can fail at any time, and an area that has been tested many times can still break.
Key takeaways
- Revenue, earnings, EPS and P/E describe a business, and a P/E depends on the earnings period used.
- Support, resistance and moving averages describe past prices and can fail.
- Compare results over the same dates, after costs and with risk in mind.
Try it in StratosHedge
Open Research for a company you know and find its revenue and earnings for its two most recent fiscal years.
Look up a company’s numbers Needs: Retail plan
Key terms
- Earnings per share (EPS)
- A company’s profit for a period divided by its number of shares outstanding.
- Price-to-earnings ratio (P/E)
- Share price divided by earnings per share. It depends on which earnings period is used and doesn’t tell you on its own whether a stock is fairly valued.
- Support
- A price area where falling prices have tended to slow or bounce because buyers stepped in before. It’s a zone, not an exact line.
- Resistance
- A price area where rising prices have tended to stall or turn back because sellers stepped in before. Like support, it’s a zone.
- Moving average (SMA, EMA)
- The average closing price over the last N candles, updated as each candle closes. It smooths noise so the trend is easier to see.
- Benchmark
- A reference, such as a broad stock index, used to compare investment results over the same dates.
Sources and further reading
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Educational content, not investment advice. Lessons describe how markets and models tend to behave. They don’t tell anyone what to buy, sell or hold. Interactive examples use illustrative sample data, and simulator results are simulated — not actual trading. Options involve risk and are not suitable for all investors.
Risk disclosureCharacteristics and Risks of Standardized Options (OCC) (opens in a new tab)